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Domestic economy in recession; Big Mac sales booming!

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Paul Mason | 19:05 UK time, Friday, 22 August 2008

Remember the day you saw that big fat zero: this is how much the UK economy grew between April and June. Nothing. Zilch. And it gets worse.

Once you drill into the figures, whole sectors of the UK economy are shrinking, and if you strip out foreign trade, the recession is not a technicality, it's a fact...

If you look at the domestic economy only, stripping out imports and exports: this has clearly been shrinking for the past six months.

The major factor in the fall in growth is the squeeze on people's spending power: household bills have risen 8%, food bills by 12% and car fuel by 25%.

But real wages, once you strip out inflation are falling, and sharply.

Downturns are part of the economic cycle and no government or central bank can stop that; what they can do is see it coming and adjust policy to meet it; and here's the problem. The government's predictions on economic growth now look way out.

In March, in the budget, Alistair Darling predicted the economy would grow at 2% this year and 2.5% next year. Last week the Bank of England's forecast was significantly lower: 0% - and lo it has come to pass.

In fact, thanks to HSBC's sharp eyed UK economist Karen Ward, we know that even this top line figure could be too optimistic. She has spotted a 2.8% fall in financial intermediation services last quarter - and here I must issue an "its complicated" alert because this has already made my brain hurt:

"As I mentioned in the earlier note: a 2.8% fall in financial intermediation would have taken 0.2pp off quarterly growth. By the current accounting standards, this is not incorporated (or more technically was removed to a large extent by +0.17pp cont. from the adjustment for financial services), but it may be incorporated in September."

So the economy may really have shrunk in any case, and we will find out one way or the other in September.

But what does it feel like out there on the streets: well it does not yet feel like one of the big, gloomy economic shrinkages we saw in the early 80s or 90s; and retail sales keep turning out better than expected. So why?

Stats people are saying a lot of retail sales are being driven by tourists. That's real, not illusory, but again the core, UK generated spending power may be falling faster than the top line figures suggest.

Here's something else interesting. Faced with a collapse in spending power, consumers are switching their behaviour to the cheap and cheerful.

McDonalds has reported double digit sales growth and is serving 2m MORE people a month this summer than last summer and has taken on 4,000 extra staff.

There's only two things policy makers can really do: they can cut interest rates here at the Bank of England; or they can cut taxes at the Treasury to put more money in our pockets; problem #1 is doing either of these things is quite hard under the current rules; problem #2 is that if Alistair Darling DOES give us all a tax cut, the people a the Bank may feel duty bound to cancel it all out.

Why? Because the Bank's projection of inflation meeting its 2% target within two years relies on there being flat growth. If it thinks a tax cut will stave this off it has to either put interest rates UP or hold them for longer.

At the end of the day, the Bank, though independent, obeys a remit set by Alistair Darling. And there's a growing chorus in the banking business that thinks policymakers have lost the plot. What's interesting though is that the political class is united in defending the current remit and its hawkish interpretation: nobody wants to look "soft on inflation". But the City is screaming for a rate cut and really bearish economists are warning of a Japan style stagnation unless monetary policy is relaxed.

Technically a recession is two quarters of negative growth. Even if we get one, the UK economy still bears the marks of sixty-odd quarters of uninterrupted growth.

But that means spotting a recession and dealing with it are tests that neither the Treasury, nor the Bank of England has had to face for nearly two decades. We'll be discussing some of these issues with Labour and Conservative front benchers tonight.

Comments

  • Comment number 1.

    7.05 pm ?

    I am under the impression this Big Mac piece did not appear up to midnight and beyond. Should we tell Shiney Boy Cameron something else is broken?

  • Comment number 2.

    according to a report about ONS and HMRC withdrawing their figures even the figures are not to be trusted?

    the ecb is now saying their cash window has to stop as the does the fed window in january and the 'mac and may' now effectively worthless. Some uk institutions are registering in ireland to take advantage of the ecb cash window.

    There are forced liquidations of positions in commodities [you think they want to sell?] to get cash to repay loans and reports of constant buying of 'atomic puts' as 'insurance' in case of an overnight crash in the markets. Traders of 40 years have never seen such volatility.

    the real economy is measured with unemployment. the huge transfer of uk wealth to energy producing countries is further slamming retail demand in the uk.


    policy makers can

    turn the energy problem from a negative to a positive by having a two way grid as in germany. this would create a whole new industry boosting cash into the economy.


    promote world stability rather than imposing 'democracy through war and confrontation'. That would take the war premium out of the commodities.

    print money because this is a once in many generations event.

  • Comment number 3.

    16 years of endless boom.

    16 years without the vitally necessary, self-adjusting, correcting bust.

    16 years of malinvestment in business hidden by an unprecedented 16 years of unhindered credit expansion.

    16 years of massive, uncontrolled inflation of the money supply.

    I'm sure it must have seemed like a really good idea at the time, after all there were always elections coming up, countries to conquer, terrorism to fight, house prices to inflate, that sort of thing; so the bad thing got put off for 16 years.

    Someone should tell our leaders to read Americas Great Depression by Murray Rothbard. Because they're about to find out what it's like to live in one.

    We are all in for a big shock.


  • Comment number 4.

    I often wonder if there is someone clever out there who has mathematically (computer) modelled the economy. Then I read all about if this then that but and I realise nope, not even the big boys have a clue.

    Perhaps we need a reset button like in XP?

    In which case we either need an asset price crash or a heavy dose of inflation.

    Who built this computer game? Is there an answer?

  • Comment number 5.

    re: 4

    The current western fiat banking system, and central banking, the system of continuous boom and bust, the system that is currently going through a bit of a bad patch at the moment to say the least, is a largely European, if not a British invention, based loosely around the world's second oldest central bank, the bank of england, which was at one time the powerhouse of the old British Empire.

    It's also a system that is based on legalized fraud, or fractional reserve banking.

    It's a financial system combined with our 'expertise' that we managed quite successfully foist on unsuspecting countries all over the world to their endless peril.

    It's a wonder they didn't see us coming and run for the hills.

  • Comment number 6.

    I think the main reason for the downturn we are currently experiencing, is because of the increase in food bills,water bills, energy bills. with no hint at government intervention,especially as the rises are way above inflation.
    Next concern is the constant regulation from government which adds to everyones tales of sorrow.
    It's like the government has become an enemy of the people, instead of servant to the people.
    Until wages start following these additional costs, everyone will hold on to their pennies, never mind the pounds! And that does not bode well for the immediate economic future. how much more of this can we take?

  • Comment number 7.

    STUCK RECORD

    The common factor in all our woes is that we humans are just no good at being human. It is no good arguing which type of government is best when government comprises a bunch of humans behaving without, honour, integrity or altruism.
    No good bandying preferred social structures, when society is made up of individuals honed by western 'culture' to a fine edge of social incompetence.
    Manipulation of imaginary money is far removed from any activity having primary purpose or a human dimension. Nuf sed.

  • Comment number 8.

    CHEAP FOOD OR EXPENSIVE FIX

  • Comment number 9.

    The " value " 12 oz corned beef at Sainsbury's has gone up from 78p to 118p in the last month. It is now cheaper to buy fresh mince on offer ( 4 quarter pound beefburgers ) for 99p. If the idiot BoE cuts interest rates the pound will crash further against the dollar than it allready is and food prices and fuel will go through the roof again.

  • Comment number 10.

    I agree with all of Paul Mason's points there I think.

    Downturns are indeed inevitable, there are mostly 3 things which can save you from a downturn being turned into a massive depression, and they are:

    1) Foreign economies saving your skin via exports (mostly services exports these days) (temporary quick-fix)

    2) Your own government tweaking policy to get through it (transitory)

    3) Your own government changing policy if their core economic ideas are unsustainable.

    At the moment (1) is helping us a fair bit in some sectors (especially I.T.). (2) is being considered but nothing is being done at all. (3) is not even being considered due to the 100% state of denial by the government.

    When your government believes/says that there is absolutely nothing that they've ever done wrong economically, and that all their economic ideas/plans are 100% correct, and yet public debt and taxes are through the roof, nobody has any money, inflation is rising, unemployment is rising, and during the boom the government didn't put any money away as a buffer, then you know we're in really serious trouble unless the government either realises that they've made mistakes and does something about them, or we get an entirely new government who understands something about economics.

    We can temporarily avoid a great depression via foreign markets, but that's just a temporary sticking-plaster; it only lasts for so long; with ever increasing public debt, taxes, inflation, and unemployment, and a government who doesn't think anything's wrong with our own economy, it's just a question of time before we do end up in a great depression.

    We need these people out of power before we all end up begging for food aid from international ngo's.

  • Comment number 11.

    This is the plot to Chicken Licken as played out by economists. The finance sector has been badly hit because they were stupid and greedy and invested in toxic shares that no sane individual would buy into - and they lost money and confidence in each other. Well how sad. Most people caught by the credit crunch are those who did not manage their finances properly and have lived off easy credit and fixed rate mortgages - not comprehending that no financial institution gives you something for nothing and the better the deal the worse it tends to be in the long run.

    The price of oil did not ramp up during the out and out Iraq war - but only subsequently when commodity brokers realised they could push the prices up and make a lot of profit very quickly because markets rely on emotion not sense - and as displayed by this blog and most of the posters - there are too many people willing to panic and turn a drama into a crisis.

  • Comment number 12.

    Agree with Paul, downturns happen. What matters is how the economy and govt responds.

    US is first in and first out, assets are repriced, mistakes are faced up to, jobs are lost and created, people move on, it's all over before you know it. By the time we all come to terms with the downturn in the EU, the US is already out of it, and revising its GBP stats up in retrospect.

    In EU, the water has to come right over the sides before anyone faces up to change.

    In UK, we're about half way between in terms of underlying economic behaviour. However its a bit worse this time because
    a. We are are more dependent on finance sector with its own issues
    b. the govt has no money, and is frozen in the headlights.

    So cheer up. It will be tight for a couple of years, but

    1 The govt will change
    2 Britains comparative adv in global services isn't going to evaporate
    3 The property bubbleboys, from res landlords, to the Spanish and Irish will have to get proper jobs.

  • Comment number 13.

    "negative growth"

    Why do people insist on using this term?

    I feel another debate on the dumbing down of the BBC.

  • Comment number 14.

    > Faced with a collapse in spending
    > power, consumers are switching
    > their behaviour to the cheap and
    > cheerful.

    This is a sign that things are getting back
    to normal. I (and many others) are only
    spending on an "absolute need" basis. We
    know there's plenty of fat in the UK
    distribution system, because the cost of
    living is much higher than elsewhere,
    say in Spain. The best cure for high
    prices is, well, high prices. Spend
    nothing and squeeze the merchants 'till
    the pips squeak.


  • Comment number 15.

    It is so depressing to read a report from Newsnight that panders to the dumbing down society 'my brain hurts'. Please can we have more research and and analysis. if you cannot do statistics how about looking at past slow downs and comparing causes, effefts and durations. This might give us a better understanding of these issues than people, epert or not, pontificating on what the future hilds when they have little or no hard information and are just pedalling their favourite view.

    In my view a good question to ask all pundits is...'On what evidence do you base that assertion?' No evidence means no value to the view expressed.

  • Comment number 16.

    No one least of all the pundits on the BBC mention the "C" word, Capitalism. It is going through yet another crisis of overproduction, leading as it always has to an inevitable slump. The greed of consumerism that is the basis of the US economy is putting enormous pressure on the planet's finite resources. It will, as it already is doing, lead to wars, hunger and destruction of the planet. Capitalist greed for more markets, more profits, more oil is the biggest menace facing the world. There are other solutions, Karl Marx predicted the crisis a century ago and what people must do to overcome it.

  • Comment number 17.

    The economy over the past 11 years became dominated by and reliant on speculative house trading as many Bankers, Brokers, Buy to Letters created a false economy to achieve their dream of easy money without much sweat.

    It doesn't and never did work that way.

    Let the adjustment take it's course without any easy way out interventions from a Government which exacerbates challenging situations as an alternative to managing them.

 

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